Tuesday, April 1, 2008

Before you make the big decision to quit your job to start your own venture or to move to a different city to start fresh, be aware of the highly biased opinion we have about our abilities. The very trait that defines an entrepreneur, unbridled optimism, works against them preventing them from interpreting the data in an unbiased manner.Wharton professor Gavin Cassar says,"It's been shown in many studies that people are overly optimistic. Individuals form an inside view forecast by focusing on the specifics of the case, the details of the plan that exists and obstacles to its completion, and by constructing scenarios of future progress."

Even when the entrepreneurs use metrics and accounting systems to budget and forecast, their self bias make them overestimate the opportunities and diminish the risks. As Cassar says, "it is important to recognize that financial projections of success are merely projections based on beliefs, which are sometimes based on overconfident or optimistic assumptions".

The other aspect that leads one to quit the current job and enter self-employment is due to incorrect estimation of costs, more specifically ignoring the opportunity cost of doing so. Focused on the earning possibilities and the project cost of making those earnings, individuals ignore the income they were leaving behind and whether the new income compares well against what they were letting go. The opportunity cost is not just your pay check, it includes the health insurance,4 01K matching, holidays and vacation pay and other fringe benefits.

The question is, when the startup bug bites you would you recognize the need to do the costing and earnings estimates right?